The reverse mortgage is a trend that seems to be hitting homes all over the country. And it’s happening at the same time that housing prices are soaring and interest rates are at their record lows. Let’s take a look at the reasons why despite the bad publicity that reverse mortgages had, they have managed to stay in the industry all these years to become the “in” thing for many borrowers today.

Nicknamed predatory loans, the reverse mortgage took more beating when it was embroiled in scandals. But in the last decade, it has earned more credibility after legislation required more upfront disclosures of costs.

This is a mortgage product designed for homeowners aged 62 and older. Through this product, seniors can receive a loan against their home in the form of a lump sum, regular monthly checks or a line of credit. The loan is typically repaid with interest when the borrower sells the house, permanently moves, or dies.

Here are some of the reasons that borrowers resort to a reverse mortgage.

Payment of Traditional Mortgages – Homeowners use a reverse mortgage to pay down their remaining debt on their traditional mortgages and use the remainder to fund other retirement costs.

Unaffected Ownership – When the loan is accepted, the ownership of your house is not affected and you will still retain title to your home.

- Most of the costs are paid for through the reverse mortgage loan.

Payment Period – Compared to a traditional home equity line of credit, a reverse mortgage allows debt payments, including interest and other costs, to be stalled until a later date, typically when the owner dies.

Debt – The debt can never go beyond the value of a home at the time that the loan is already repaid. This means that when soaring housing prices begin to drop, borrowers won’t be held responsible for paying back a higher amount.

However, there are also its negative aspects.

Rate Variability – A reverse mortgage tends to be a variable rate mortgage loan that entails substantial front-end expenses to compensate for expenditures if ever the borrower exits early.

Higher Prices for Older Borrowers – The loan will be bigger for pricier homes and older borrowers.

Complicated – According to advocates and financial planners, a reverse mortgage can become expensive and complicated. Therefore, seniors who are interested in applying for a reverse mortgage should first learn how it works. Before they look for a lender, they should be ready to receive independent counseling.

High Rates – Borrowers who choose to take the lump sum are slapped with higher interest payments compared to those who settle for installment checks or a line of credit. The reason for this is that, with the two latter choices, interest is only computed on the portion used.

While financial planners recommend that seniors only take a reverse mortgage if they plan to stay longer in their homes, evaluating the product’s options may still be confusing. Before you apply for a reverse mortgage loan, make sure that you get impartial counseling first to help you decide if the product is right for you.

People are really pretty trusting. As a reverse mortgage loan officer people actually ask me if the reverse mortgage is a good choice.

You may not believe this but I always say it is not a great choice for everyone. Its situational and some borrowers should simply walk away.

The reason most are calling me is that money is extremely tight. There are the exceptions who are looking for investment money but most need the money.

Generally speaking most are on social security and some form of pension, but others are still working and planning on retirement.

When they ask me their question Im primarily focused on their long term equity position in their homes. They may need that equity if a major financial issue presents itself.

Lets face it life happens and we have to be ready for it. That means we have to be financially ready.

Along these lines I like to see prospective borrowers use the mortgage intelligently to increase their disposable income and to use that income in the proper places.

For most the equity in the house is their largest asset it may be needed for a vital reason. The point is once its gone these folks wont have another money source to draw on.

The point here is to use it as a last resort. If it is possible to keep making mortgage payments on a current mortgage it may be best to keep doing so and wait to pay it off with a reverse mortgage.

Some have their home paid off and simply want to add to their income. These folks should use a line of credit. By doing so a very small amount of interest accrues against the equity of the home.

Additionally, the unused funds in the line of credit will accrue interest for the borrowers favor. The net effect of this is increased borrowing power over time.

As a guy who gets people these loans I know they are a real benefit. However, they can be misused and I implore you to use them with care.

I had an senior reverse mortgage prospect contact me last Tuesday. He claimed his property was worth a certain amount and wanted to know how much money we would lend him.

I pulled out my supercomputer, punched in the numbers and out popped about $130,000. He said, “let’s do it”. So, what he wants to do with the money is take all $130,000 and put into his bank account. He’d make draws thereafter for living expenses.

I say, “slow down there partner, I don’t think this is your best choice”. He has a very typical reverse mortgage need. That is the need for additional funds to cover life expenses.

He owns his home outright. All he wants is some supplemental income.

Currently, there exists 4 separate choices for borrowers to make to pull money out of their mortgage. It just so happens, based upon his specific needs, he chose the worst one.

My borrower has these four options:

Number one is for the mortgage company to deposit a large glut of money right into the borrower’s bank account. The borrower can use this lump sum option to pull out any amount at or less than the mortgage companie’s alottment.

The second option is to take a set monthy draw. In this case the lender sends the borrower a set amount every month. This can be done for a life long period or a period determined by the monthly draw.

The 3rd choice is to opt for a line of credit. In this circumstance the lender allows the borrower to pull money out on an as needed basis. Unused money does not accrue interest against the home’s value. For this reason this third option is a very popular choice.

Another important point to note about the line of credit is money sitting in the line of credit is accruing interest for the borrower’s favor thus increasing borrowing power over time.

Number 4 is to combine our prior 3 plans in some way.

If we look more closely at my prospective borrower we can see that his best choice was a simple line of credit or a monthly stipend rather than the lump sum draw. He didn’t need it, so why take that money out only to have all that extra interest accrue against the home’s equity.

Different choices exist because we all have unique situations.

Reverse mortgage lenders lend to borrowers on three criteria; value of the home, age, and interest rates. The older the borrower, the more a lender will lend to that person as a ratio of the value of the home.

In the very typical situation in which 2 borrowers will be on the loan, the mortgage company discounts the older borrower and only takes into consideration the younger borrowers age.

Since one of the ways a reverse mortgage ends is when the last person on the mortgage passes on reverse mortgage lenders must play the percentages to reduce their chances of the loan amount inflating above and eliminating the equity in the home.

The thing the lender must take into consideration is how interest accumulates and compounds over time. The mortgage company has to lend less to the younger borrowers because they live longer, and interest has more time to eat away at the equity.

That being said borrowers may realize a dilemma if one spouse is quite a bit older than the other. If the couple needs a sizable sum of money out of the mortgage, the age of the younger borrower can dismantle this plan.

How some people get around this is by disclaiming the younger spouse from the note and deed of trust. They can now cash out at the larger sum.

Fabuloso! The borrowers have their needed cash.

Of courseit couldnt be that easy, could it? There is something that perhaps our couple didnt think through in this scenario. The older spouse is probably going to die first.

After the bank finds out of the older borrowers passing (and they will), the remaining borrower will be notified and has roughly a year to compensate the bank.

Since reverse mortgages are generally used on a I need the money because I need the money basis, chances are the surviving spouse will need to sell the home at that point.

Many people have lived in their home for generations. What must be remembered is the bond that people can have with their residence. Make sure disclaiming a younger spouse is worth possibly losing the house and all of the memories that go with it.

Disclaiming the spouse should be done on a need basis and both spouses should understand and accept the future consequences.

Everyone has financial dilemmas that arise in life, and if you’re a senior, you may know that getting a reverse mortgage is a common way to alleviate these issues.

You know you can take the equity in your home and somehow convert it to cash, but perhaps that is about all you know. You want to know more so you head to the internet and start looking for info.

How wonderful to see so much helpful information. There are guides, informational brochures, and all sorts of websites offering general overviews. You are definitely in the right place for getting started.

You notice you can fill out a form and a report will be sent to your home. Great! Thats what you want, so you fill out the form and wait.

What you may not know is these websites are not non-profits. These are lead generating websites designed to capture your information and hopefully make a profit.

Profit is made 1 of 2 ways. The website owner could be an actual lender vying for reverse mortgage clients, and wants to be the one you pick should you continue the process.

Or they are in the lead sales business. This is big business in the reverse industry. Some of the most informational websites are also the most profitable lead generators.

This kind of site will take your information and offer it up (for a price) to a lender of reverse mortgages, so that lender can offer their services to you.

You fill out the form, wait for the info, and little do you know, youll be receiving a phone call from a local reverse mortgage lender. He or she will remind you that you filled out the form and of their affiliation with that website.

Perhaps you entered your contact details on numerous websites for free guides. This means that multiple companies will be contacting you.

And by the way, it is a very competitive business so you can expect multiple calls from each of these folks attempting to garner your business.

So, as you gather reverse mortgage information online, if you give out your contact info, prepare yourself for phone calls that you were not necessarily expecting.